Not so fast
Volkswagen is doing well. It increased operating profit by 20 percent in the third quarter. It reiterated its guidance for the full year. Cheerful investors pushed Volkswagen’s shares up by 4.5 percent on Oct. 30. But Europe’s largest carmaker cannot yet claim to be a high-performance vehicle.
Much of VW’s strength derives from the integration of sports carmaker Porsche. The luxury marque, acquired after its failed attempt to take over Volkswagen, earns an operating margin of 18 percent. That’s four times as much as the rest of the group. In the first nine months of 2013, Porsche generated 7.2 percent of Volkswagen’s revenue and 22 percent of its operating profit.
But Porsche’s results have only been fully consolidated since August 2012 so annual comparisons are distorted. The contribution also disguises weak spots elsewhere. Set Porsche aside and VW’s automotive revenue dropped by 6.8 percent in the nine months and operating profit fell 27.6 percent. Sales and administrative costs increased in absolute as well as in relative terms. The operating profit margin dropped from 5.8 percent to just 4.5 percent. VW passenger cars did even worse. They earned a measly 2.9 percent in the first nine months. That’s better than peers such as Peugeot and Fiat but it is unimpressive given that VW’s most important model, the Golf, was relaunched in November 2012.
Weak consumer demand in Europe is part of the issue. Earnings are also suffering from a large-scale revamp of production practices. Volkswagen is trying to deploy standardised components across different models and brands. It hopes the so-called “modular traverse toolkit” will eventually reduce costs by up to 1,500 euros per car. Some, including Max Warburton at Bernstein Research, think the benefits could be a lot more modest.
Volkswagen shares trade on a forward price-earnings multiple of 7.3, Starmine data shows. That makes it one of the cheapest European carmakers. If the discount is to narrow, VW will have to do more than show off its Porsche.